OpenDoor Technologies (NASDAQ:OPEN), created as a platform for making homebuying easier, became the King of the House Flippers in 2021. Naturally, OPEN stock caught the eyes of many investors as a result.
While rival Zillow Group (NYSE:Z) closed its iBuying unit, OpenDoor doubled down. It had almost $6.3 billion of housing inventory at the end of September. This asset base made its loss of $57 million, or 9 cents per share, on revenue of $2.27 billion easy to swallow.
OpenDoor’s success in house flipping has excited analysts. Our Luke Lango compares buying OpenDoor today to buying Amazon (NASDAQ:AMZN) in 1997. But is this really the case?
The Case for iBuying
If you believe Lango’s argument, you can still get in on the ground floor. OpenDoor stock is down 25% since its latest earnings release.
OpenDoor may be the “King of the iBuyers,” able to buy homes quickly at favorable prices. The company is now in 42 markets. In fact, a home just two blocks away from me now has a blue OpenDoor sign on it.
The “I” in iBuying stands for “instant.” OpenDoor’s algorithms set the price it pays, usually slightly below the market. The company also charges sellers higher fees than a traditional listing agent.
The model still represents just 1% of the $2 trillion housing market, so the opportunity is huge. OpenDoor CEO Keith Rabois insists Zillow failed only because his company’s technology is superior, using data science to close deals quickly.
OpenDoor’s speed lets it profit on low margins, at just 13% in the first half of last year. Zillow’s exit from the business tarnished OpenDoor stock, however. Its market cap is now just twice its expected 2021 revenue. Given that it expects to more than double that revenue in 2022, our Muslim Farooque calls it a bargain.
The Growth Case for OPEN Stock
OpenDoor is doing all it can to exploit its advantages. It bought, then shuttered, two start-ups doing online home improvement. It entered the new home market through a partnership with Builders Digital Experience (BDX). On top of that, it bought a mortgage broker called RedDoor that can approve applications in a minute.
Assuming the housing market stays red hot, OPEN stock can take full advantage. The problem is that both real estate and stock prices have reached bubble valuations.
Analysts are worrying about a possible crash. Housing prices are rising not because of iBuyers, but because private equity is buying property to rent out. Rentals are on fire thanks to Airbnb (NASDAQ:ABNB), which lets landlords get a month’s rent by letting properties for a few days at a time.
Despite its failure as an iBuyer, Zillow still has nearly twice the market cap of OPEN stock. One analyst has suggested Zillow just buy it to monopolize online real estate.
That’s not going to happen. President Joe Biden’s administration is likely to attack monopolies in 2022, blaming them for inflation. There also seems to be a lot of bad blood between Zillow and OpenDoor. The two companies have now diverged, with Zillow focusing on market data and OpenDoor on transactions.
Besides, OpenDoor is not the monopoly it appears to be at first glance. Companies like Redfin (NASDAQ:RDFN), Offerpad Solutions (NYSE:OPAD) and Knock are all growing rapidly.
The Bottom Line on OPEN Stock
Real estate is ripe for disruption. It can cost you 15% of your equity to make a move when you add up commissions on two transactions and moving costs. But OpenDoor isn’t cutting those costs. It’s just taking advantage of them.
The question for you, as an investor, is what happens when markets sour. In theory, OpenDoor’s technology should make OPEN stock a winner. But the reality is its model still depends on rising real estate prices to fuel the stock.
If you bought Amazon in 1997, you look like a genius. Just remember you had to hold it for a decade to break even.
On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.
